Crypto Hedge Funds Outperform Bitcoin, Trim Losses in April

While crypto-focused hedge funds saw their returns nosedive in the first quarter of this year following a broader market downturn, April provided some much-needed relief for the majority of these funds.

Compared to Bitcoin surge by 31%, the HFRI Blockchain Composite Index, which tracks 24 hedge funds investing in cryptocurrencies, grew more than 47% in April, more than making up for the 34% loss in March. Although the index dropped 52.6% over the first quarter of 2018, many fund managers are now turning optimistic again.

Still, it is no stretch to say that this year has been rough for hedge fund managers when compared with the 2,774% gain seen during 2017, for which the average return of the global hedge fund industry as a whole was 8.7%.

Among the worst performers in the first quarter was Pantera Capital, which saw the value of its Digital Asset Fund, which was launched in November and includes a number of different virtual currencies, cut in half in March. The fund was down 45.6% in March and ended the first quarter of the year 54.9% lower, compared to an annual gain of 25,000% at the end of 2017. However, the fund surged by 46% last month, Bloomberg reported, citing Pantera’s letter to its investors.

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“As we improve our order execution our slippage and market impact will decrease and so will our time to put new positions on, which should substantially improve performance even further,” the fund founded by Dan Morehead said in the letter.

Pantera Capital is the 8th largest crypto fund, according to Autonomous Research (AR), an independent research provider on the financial sector.

Market-neutral funds still made a killing

Despite the challenging overall crypto market in the first quarter of this year, some funds have withstood the selling pressure and continued to make money.

Many of the funds that continued to perform well in 2018 were so-called market-neutral funds – hedge funds that are designed to generate absolute returns no matter what direction that overall market may be heading.

Among these were Hong Kong-based Amber AI Group’s fund Pivot Digital Trading-2, which posted a 30% gain in the first quarter. Market-making and arbitrage trading between exchanges were the funds’ main sources of income in an otherwise challenging market for cryptocurrencies.

Possible shut downs?

Faced with the steep decline of the market, at least nine cryptocurrency hedge funds have shuttered this year, including familiar names such as Crowd Crypto Fund and Alpha Protocol, according to earlier report by Bloomberg. Lex Sokolin, Global Director of FinTech Strategy at Autonomous Research, previously estimated that up to 10% of all crypto funds could shut down by the end of this year as only 50 funds would be able to raise enough outside capital to be sufficiently capitalized to serve institutional investors.

However, with Tax Day over in the US and investors coming back into the market, many hedge funds are now positioning themselves for new gains in the bitcoin market.

Pantera, for example, says that bitcoin has likely hit a bottom at the $6,500 level and is on its path to a new record high this year.

There are currently about 251 crypto fund, with USD 3.5 - USD 5 billion in assets under management, AR estimates.

Many of the funds were born in 2017, amid skyrocketing prices for cryptocurrencies such as bitcoin. In 2017 alone, when the bitcoin price surged more than 1,300% to nearly USD 20,000 in December, over 150 crypto hedge funds were created.